THE DISTRIBUTION CONTRACT “With the concession purchase of the goods and risks transferred”

Marcello Mantelli
Lawyer in Milan and Turin


In international trade, one of the most widespread operating methods for entering new markets lies in the distribution contract (or sales concession). With this contract the dealer undertakes to purchase the products from the supplier and to promote their sale to the categories of customers agreed in a certain territory. The distributor deals with the promotion of sales by acting in the name and on its own behalf, thus assuming the related risks of non-payment of its customers and this to the benefit of the grantor.

It operates exclusively or not, depending on the agreements, but almost always stipulating a non-competition agreement with which it undertakes not to resell or treat in any contractual capacity the products of the supplier’s competitor. The non-competition agreement, according to European Anti-trust law (EU Regulation 2022/720 article 5, paragraph 1, letter (a) of 1 June 2022), cannot have an undetermined duration or longer than five years. However, it may be agreed for subsequent periods of commercial cooperation in the context of a new distribution contract following the expired one.

The distributor should not be confused with the agent. Both are dedicated to sales promotion. Both are commercially integrated into the manufacturer’s sales network. But the distributor buys the goods from the supplier and resells them to third parties, while the agent does not operate as a buyer-reseller. It is an intermediary on commission that it receives on the basis of sales that it procures to the principal, without assuming the risk of non-payment of the principal’s customers.

In several contracts called “agency agreements” or “distribution agreements” we have found deficiencies or ambiguities about the actual tasks entrusted by the manufacturer to the partner in the contract. In some cases, the partner, whatever the name of the contract, is qualified as an “agent”, but without specifying what specific activities it must perform. In these cases, the agent will of course operate according to the commercial situation that best suits him, but which may not agree to the grantor, who will unfortunately have to suffer the initiatives of the partner for the simple fact of having been superficial in the establishment of the contract. On the other hand, the distinction between a sales concession and a relationship with a loyal customer over time based on individual sales is more difficult.

According to Italian case law, the line of demarcation between concession of sale and series of sales to a loyal customer is based on the fact that in the first normally there will be a framework contract in which the commitment of the parties to complete individual purchase and sale contracts is agreed, according to the terms and conditions agreed in the distribution contract (Cassation 26th of July 2010, n. 17528). For contracts subject to the law of other countries, the approach of local courts will need to be checked on a case-by-case basis.

The utility of the use of a distribution relationship lies primarily in the flexibility of the contractual type, as it can be used in many sectors of interest and for different Industries and for many types of products and services in virtually all countries of the world. It also guarantees the possibility of obtaining a widespread presence in the target territory, allowing then to enter new markets through the knowledge of the distributor of the target country and customers. Over time, after testing the market and obtaining an adequate turnover, the relationship could then eventually evolve into a form of stable presence through, for example, the establishment of companies on site in joint-venture with the local partner or through a wholly owned subsidiary of the exporter.

Although to date there are many countries (including Italy) that do not provide for a specific discipline of the distribution contract, it is worth noting the presence of an international contractual practice that has created typical contents with basic clauses, to be adapted on a case-by-case basis to the commercial operation, taking into account the marketing plan and the commercial objectives of the supplier, the applicable law and its effects on the commercial operation (to verify, therefore, the presence of rules governing the concession of sale) including the rules of application necessary (mandatory) in the country where the distributor is located and an appropriate dispute resolution method.

THE DIFFERENCE “Between distributor and agent”

The former buys the goods from the supplier, while the latter does not operate as a reseller buyer.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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